It always pays to watch the news

Global events can mean changes to your portfolio Many world markets hit record highs in January, but a lot has happened in the world since then.

Investors have been confronted with worrisome headlines in the financial press regarding record levels of inflation and, more recently, the Russian invasion of Ukraine.

But do large losses in a handful of popular stocks signal a downturn ahead for the broad market?

Invariably, the question behind the question is: “Should I be doing something different in my portfolio?”

This is just another version of the market timing question dressed in different clothes: “Should I sell stocks and wait for a more favourable outlook to buy them back?”

Or, more precisely, can we find clear trading rules that will tell us when to buy or hold stocks, when to sell and when to admit our mistakes?

Researchers over the years have examined a wide range of strategies based on analysis of earnings, dividends, interest rates, economic growth, investor sentiment, stock price patterns and so on.

The money management industry is highly competitive, with more stock mutual funds and Exchange Traded Funds available in the US than listed stocks. If someone could develop a profitable timing strategy, we would expect to see some funds enjoying excellent results.

But successful timing requires two correct decisions: when to reduce the allocation to stocks and when to increase it again.

Watching a portfolio shrink during a market downturn can be concerning, but investors seeking to avoid the pain

The initial upsurge in prices from the lows does take investors by surprise

by temporarily shifting away from their long-term strategy may wind up trading one source of anguish for another. The initial upsurge in prices from their lows often takes investors by surprise, and they find it hard to buy stocks that were available at sharply lower prices just a few weeks earlier.

The opportunity cost can be substantial: Over a 30-year period ending in 2020, the American S&P 500 index would have returned on average 10.2% pa. But during this 30-year period, missing the best 15 days would have shaved the return down to 6.5% pa – an alarming 36% reduction.

Add to this the likelihood of increased transaction costs and the tax consequences of a short-term trading strategy and the odds of adding value through market timing grow even slimmer.

As a financial planner once said: “A portfolio is like a bar of soap. The more you handle it, the less you have.”